Market-Tested Innovation

From Cafe Hayek. Excerpt:

"The title of this post comes from Deirdre McCloskey.  It’s the term Deirdre uses to describe the proximate source of the vast riches enjoyed daily by ordinarily people in modern market-oriented societies.  Innovation is the act or process of coming up with a new, creative idea.  And innovations are market-tested if their success or failure is determined through a process of voluntary choices: no one is forced to purchase, to use, or to fund an innovation; no one is prevented from purchasing, using, or funding an innovation; everyone who wishes to use his or her own resources to act innovatively, or to fund an innovation, is free to do so.

Under such rules (along, of course, with basic laws of property, contract, and tort) – and in a culture that honors bourgeois virtues and applauds innovators – there will be lots of entrepreneurs striving to earn profit (and respect) by creating new goods and services.  These entrepreneurs will compete with each other, as well as with producers of older, established goods and services.  The goods and services that yield profits today for their producers will be the ones that consumers, spending their own money and only their own money, today choose above all others.  No finer, more objective, or more accurate test is available for determining how scarce resources should be used.

Tomorrow, of course, entrepreneurs will introduce newer products and newer production processes.  Some of these, tested by market competition, will succeed.  Others will fail.  Some older goods and services, once profitable to produce, will become unprofitable to produce.  Resources, including human labor, will shift from these older to the newer lines of production.

And so it goes in a free, prosperous, and growing market economy, day-in and day-out; year-in, year-out; decade-in, decade-out.  Such an economy is controlled or guided by no one, yet it serves everyone remarkable well – if, though, with the requirement that everyone abide by the rules of the game.  These rules are those listed above.  These rules imply that no one has a right to any one else’s property – a rule that, in turn, implies that no producer has a right either to prevent other producers (even those in foreign countries) from competing for the patronage of her customers, or to obstruct her customers from shifting their expenditures away from her product offerings.

One happy result of the now two-hundred-plus years of market-tested innovation in large parts of the world is the princely, historically off-the-charts-high standard of living enjoyed even by those middle-class people in countries such as the United States and France who mistakenly think themselves to be the unfortunate victims of capitalist oppression – fantastically rich people who read (about) Thomas Piketty’s book and then moan that some small number of other people are even more fantastically rich than they are.
…
I remember back in the late 1970s or early 1980s when I first noticed that still water began to be offered for sale in single-sized bottles.  I was convinced that this product would fail.  ”Who would pay for still water in single-sized bottles when still water can be gotten for free out of water fountains and water coolers or at zero marginal cost out of faucets at home?” I reasoned.  Whether I reasoned rightly or wrongly, my prediction proved wrong.  Reason, you see, is a wonderful and necessary tool, but also one of limited power.  My reason could not reveal to me the preferences of millions of other people.  My reason could not reveal to me the ambitions and the creativity of entrepreneurs.  My reason could not reveal to me the details of an open-ended future in which people are free to spend their money – as consumers, as producers, and as investors – as they wish.

If I were a government planner in the 1970s or early 1980s – a planner with the highest integrity and most intense desire to serve my fellow citizens – I would have counseled against directing society’s scarce resources into the production and distribution of single-sized bottled still water.  My reason would have assured me of the prudence and correctness of my decision.  And if I were such a government planner whose diktat would have been heeded, no one would ever have learned that my decision stunk.  Being prohibited by the state from being offered to consumers, still water bottled in single-sized servings would never have had the chance to grow into the multi-billion dollar industry that it is today.  That innovation passed the market test."